EU Commission warns Malta

Malta is one of six new EU members that were yesterday slapped with warnings by the European Commission over their worsening government finances.

The Commission called on Cyprus, the Czech Republic, Hungary, Malta, Poland and Slovakia to get their public deficits in line with EU rules by 2008.

On the basis of the Commission's recommendations, the ECOFIN Council (composed of the EU's finance ministers) is expected to adopt, on July 5, an opinion on the convergence programme drawn up by the Maltese government for 2004-07 and recommend further steps.

Based on a plausible macro-economic scenario, the convergence programme envisages that the deficit will narrow from 9.7 per cent of GDP in 2003 (which includes a one-off operation of 3.2 per cent of GDP) to below three per cent in 2006 and a further drop thereafter.

The Commission noted that the excess of the deficit over the three per cent of GDP reference value in 2003 did not result from an unusual event outside the control of the Maltese authorities, nor from a severe economic downturn, in the sense of the Stability and Growth Pact.

The Commission's main conclusions on the convergence programme of Malta are as follows:

The macro-economic scenario underlying the programme foresees growth to accelerate from about 1.1 per cent in 2004-05 to 2.1 per cent in 2006-07.

The growth forecast for 2004-2005 is lower than projected in the Commission's spring forecast.

The budgetary strategy presented in the programme aims at bringing down the general government deficit from 5.2 per cent of GDP in 2004 to 1.4 per cent in 2007, well below the three per cent reference value but still inconsistent with a close-to-balance budgetary position, the Commission said.

This strategy is based on spending control and rationalisation, complemented on the revenue side by improving tax administration in order to avoid tax evasion.

If fully applied, the budgetary strategy outlined in the programme should therefore suffice to bring the deficit to below three per cent of GDP in 2006, the Commission says.

Debt ratio is projected to slightly increase in 2004 and 2005 to gradually decline from 72.4 per cent of GDP in 2005 to 70.4 per cent of GDP in 2007 but still well above the 60 per cent reference value, the Commission noted.

Malta faces a risk of budgetary imbalances in meeting the budgetary cost of aging populations, the Commission said.

It recommended to the Council that this medium-term adjustment path should form the basis for the correction of the "excessive deficit".

The Commission's recommendations and opinion were adopted on the initiative of Joaquin Almunia, EU commissioner for economic and monetary affairs.

All new entrants are committed to joining the eurozone at some point.